September's Fed rate decision a 'close call': minutes

[WASHINGTON] Last month's Federal Reserve decision not to increase interest rates was a "close call" for several policymakers, supporting views that a hike could come in December, according to minutes released Wednesday.

Some other members of the Federal Open Market Committee also believed it would be "appropriate" to raise rates "relatively soon," according to the minutes of the September 20-21 FOMC meeting in Washington.

Throughout 2016, the US central bank has held its current target range of 0.25-0.5 per cent steady to avoid interrupting a fragile economic recovery.

But the meeting minutes supported the view that it is poised for an increase at its final meeting of the year in December in order to prevent inflation from taking off.

"Several members judged that it would be appropriate to increase the target range for the federal funds rate relatively soon if economic developments unfolded about as the committee expected," the minutes said.

"Among the participants who supported awaiting further evidence of continued progress toward the committee's objectives, several stated that the decision at this meeting was a close call."

The FOMC, which sets interest rates, has been openly divided since the summer on the timing of its next increase. Those seeking to raise rates have cited strong job growth and warned that delaying could require the Fed to raise them suddenly in the future, creating an unnecessary shock to the economy.

However, they have been outnumbered by policymakers who pointed to slack in labour markets and argued that signs of inflationary pressure are missing. Core inflation in the US has remained below the Fed's target 2 per cent for more than four years.

The Labor Department reported last week that the US economy created 156,000 jobs in September while the unemployment rate actually rose a tenth of a point to 5.0 per cent as more job seekers returned to the hunt for work.

But some participants in the meeting, which occurred prior to the jobs report, believed job markets were in fact beginning to tighten.

"Some participants pointed to the slowing in payroll gains and modest pickup in wages this year and judged that the labour market had little or no remaining slack," according to the minutes.

Divisions among the committee persisted, however, with others saying lackluster wage growth, high-levels of part-time work and rising labor force participation showed that slack indeed persisted.

Economists took the jobs report, which was solid but below analyst expectations, to indicate that a December rate hike was possible but not guaranteed.

But Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the FOMC minutes also showed that the committee's disagreements were balanced on a knife's edge.

"The hawks are still the minority, despite repeatedly warning that holding off hiking now raises the risks of bigger increases and unpredictable downside growth risks later," he wrote in a message to clients.

"But it won't take much, we think, to tip the committee into a majority in favor of tightening."

Fed futures markets on Wednesday afternoon put the likelihood of a December rate hike at close to 70 per cent. The Fed is due to meet next on November 1-2, days before the US elections.

Joe Manimbo, a senior market analyst at Western Union, said the minutes confirmed that a December rate hike was still likely.

"The minutes hinted at a readiness but not quite a willingness yet to raise borrowing rates," he said in a client note.

Currency and equities markets showed little reaction to the minutes' release, with the dollar continuing gains against the euro, which bought US$1.1017 shortly before 2000 GMT, versus US$1.1040 two hours prior to the Fed release.

AFP